Undervalued firms deliver longer-term opportunities

Commentators get hooked on equity market index levels.

The German Dax Index has risen from its March 2009 low of 3,666 to 5,875 in mid-January 2010, so investors infer it is becoming expensive. Those same investors conveniently forget that back in 2007 the Dax Index was at 8,092. So does that mean it is now cheap? The Europe ex UK historic P/E ratio at 18x looks high but this includes one of the worst corporate periods in living memory. As we exit recession, we would expect this multiple to drop back as earnings recover. From a relative perspective, European markets look cheap. According to figures from Datastream European ex UK equities off...